CRS: Common Reporting Standard- Automatic Exchange of Financial Account Information, OECD
CRS: Common Reporting Standard- Automatic Exchange of Financial Account Information
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CRS: Common Reporting Standard
G20 Leaders at their meeting in September 2013 fully endorsed the OECD proposal for a truly global model for automatic exchange of information and invited the OECD, working with G20 countries, to develop such a new single standard for automatic exchange of information, including the technical modalities, to better fight tax evasion and ensure tax compliance.
The Standard, developed in response to the G20 request and approved by the OECD Council on 15 July 2014, calls on jurisdictions to obtain information from their financial institutions and automatically exchange that information with other jurisdictions on an annual basis. It sets out the financial account information to be exchanged, the financial institutions required to report, the different types of accounts and taxpayers covered, as well as common due diligence procedures to be followed by financial institutions.
Part I gives an overview of the Standard. Part II contains the text of the Model Competent Authority Agreement (Model CAA) and the Common Reporting and Due Diligence Standard (CRS). Part III contains the Commentaries on the Model CAA and the CRS as well as a number of Annexes. This report was first released in preparation to the February 2014 meeting of the G20 Finance Ministers and Central Bank Governors, where it was presented to, and endorsed by, them. The report is now included in Part II of the Standard.
CRS: Common Reporting Standard- Automatic Exchange of Financial Account Information
If you keep an account abroad on or after 31 December 2015, regardless if in your name or in the name of a incorporation, your tax office will be informed annually automatically – under certain preconditions – on the account balance and credits to the account, as long as the following preconditions are met. Trustees (as long as they are recognizable as such) foundations, trusts etc. are invalid and have to be disclosed to the bank. So far about 100 countries are participating, among them all renowned Onshore and Offshore finance centers of the world like Switzerland, Hong Kong, Singapore, the United Arab Emirates, Seychelles etc.
- For new incorporations (starting 1 January 2016) there is no longer a trigger point (all accounts are reported, regardless of the account balance / account credits amount, except if it concerns “active corporations” as defined by the OECD definition).
- For old incorporations / business accounts (founded/installed before 1 January 2016) the trigger point is US$ 250.000 (except if it concerns “active corporations” defined by the OECD definition).
- Accounts of natural persons = no trigger point, regardless if old or new accounts no exceptions or restrictions.
If the above mentioned preconditions are met, you can no longer manage a foreign or respectively offshore company without your tax office automatically learning about it- at least not easily.
At the latest on 31 December 2015 you face the following alternatives:
- You don’t incorporate a company abroad, as long as you can’t meet the mentioned criteria
- The reason for installing of a foreign company is not the minimization of ongoing income tax burden. The domestic tax office is informed of the true circumstances the taxation takes place in your country of residency. In the process – at least in Germany and many other countries – the tax secrecy is kept.
- With the incorporation of a foreign company the installation of a “qualified business establishment” in the country of incorporation occurs (arm’s length principle is to be observed), so with rented office (rental contract between company and landlord) and i.a. local employees. The place of management emanates verifiably from the locally residing director. Accounts of such “active corporations” are excluded from the exchange of information. You tax office could learn about this anyway, as there is no abuse of law.
Insertion: Regarding the arm’s length principle a distinction has to be made between corporations that are founded in the EU by EU residents, DTA circumstance and non-DTA circumstance.
- In the country of incorporation (abroad) it is a productions site, a location for the extraction of natural resources, an agricultural or forestry business, a construction site that last longer than 9-12 months (according to DTA) and there is a double taxation agreement between the two countries. Accounts of such “active corporations” are excluded from the exchange of information. Your tax office could learn about this anyway, as there is no abuse of law.
- You are relocating abroad: in countries like England, Ireland and Malta as a foreigner you don’t have to declare and pay taxes on your international revenue, if you have Non Dom status.
- You or your representative- relocate the domicile and residency to the country of the foreign company and act yourself as director of the foreign company. The exchange of information won’t matter to you.
What does this all mean?
The CRS means the final end for incorporations of mere “letter box companies” abroad, where only a registered office is provided and the “alleged director” of the foreign company receives an absurdly low salary which reveals the trust instantly. With this also the end for “cheap incorporation agencies”, which provide “mass nominee directors” for absurdly low fees (e.g. 300 USD annually) and/or install a mere registered office as permanent establishment, where thousands of corporations have their place of management.
A good example: The BVI (British Virgin Islands) have approx. 36.000 residents (a “mini state”), but there are approx. 400.000 (in writing: four hundred thousand) “letter box companies” registered on the islands. Hardly imaginable what would happen, if only 30% of these letter box companies wanted to realize a permanent establishment, so an office and employees! With this example you also see that in most tax haven countries it is impossible to install an active corporation, even if one wanted to. And of course only a few mass nominee directors act for thousands of BVI corporations as “alleged directors”.
With incorporations abroad it has to be seen to in the future that no letter box company, but active corporations as defined by the OECD definition are founded:
- Beside a registered office, also a permanent establishment abroad. For this, in case the client doesn’t rent his own office abroad, we can link-up to a Business Center in the respective country: Company name plate, individual phone number, personal call reception with name of the company, mail, fax and the permanent rental of fully equipped offices at the Business Center. With Virtual Office Plus: Virtual Office and 40 hours office use per month (can be sufficient for certain constellations). If the actual business tasks are done at the Business Center, cannot be proven with clever organizational design.
- As long as the client – or a representative – doesn’t relocate his main residence to the foreign company’s country of incorporation and acts himself as director: Local resident natural person is employed as director of the company with comparable wages. He manages visibly the fate of the company (Article 5 Double Taxation Agreement: Place of management as place of permanent establishment..). With a nominee solution: The trust relationship cannot be recognizable externally, the remuneration cannot be absurdly low, the (nominee) director has to visibly steer the company’s fate. With rising sales/revenue the wages have to be adjusted, the (nominee) director cannot be acting as director with hundreds of companies etc…
The CRS as “additional measure” to prohibit unlawful formation
The CRS has to be considered as an additional – very effective measure – to prohibit / uncover tax fraud. In addition there are other laws and regulations e.g.:
- Negative effect of national regulations in regards to taxation at source. Not in an EU context, as national regulations on taxation at source are unlawful in the EU.
- Negative effect of national regulations on business restructuring
- Taxation on undisclosed reserves on relocation to foreign country. Not in EU context: In regards to taxation there cannot be a difference, if a Hamburg GmbH is relocated to Munich or Malta.
- Reversed onus of proof. Not in EU context
- Malpractice clauses in the double taxation agreements, large and small DTA disclosure clauses
We advise our clients on the right structure of the foreign company and realize active corporations abroad, incl. permanent establishment, employed local director or structure via trust, without the trust relationship being disclosed. In the process we analyze which substance/infrastructure is to be installed abroad, so the arm’s length principle is observed.